3M Company — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; unaudited consolidated results, compared with Q1 2022. 3M is a diversified global manufacturer with four reportable segments: Safety and Industrial; Transportation and Electronics; Health Care; and Consumer.
Financial performance and liquidity
| Metric | Q1 2023 | Q1 2022 | Change / context |
|---|---|---|---|
| Net sales | $8.031B | $8.829B | Down 9.0%; organic sales down 4.9% |
| Operating income / margin | $1.241B / 15.4% | $1.641B / 18.6% | Income down 24.4%; margin down 3.2 percentage points |
| Net income attributable to 3M | $976M | $1.299B | Down 24.9% |
| Diluted EPS | $1.76 | $2.26 | Down 22%; company-reported adjusted EPS was $1.97 versus $2.63 |
| Operating cash flow | $1.275B | $1.011B | Up $264M |
| Capital expenditures / free cash flow | $475M / $800M | $424M / $587M | Free cash flow is a non-GAAP measure |
| Cash, cash equivalents and marketable securities | $3.992B | $3.916B at Dec. 31, 2022 | $2.7B held by foreign subsidiaries; $1.3B in the U.S. |
| Total debt / net debt | $15.960B / $11.968B | $15.939B / $12.023B at Dec. 31, 2022 | Net debt is a non-GAAP measure |
Cost of sales rose to 57.4% of sales from 54.7%; SG&A was 21.3% in both periods, and R&D rose to 5.9% from 5.4%. The effective tax rate declined to 17.7% from 18.8%. The company paid $827M in dividends and declared a quarterly dividend of $1.50 per share.
Current assets were $14.963B and current liabilities $10.556B at March 31, 2023. Current liabilities included $3.012B of short-term borrowings and current debt, up from $1.938B at year-end. 3M had $1.1B of commercial paper outstanding, undrawn credit facilities, and an approximately 17:1 EBITDA-to-interest ratio against a 3:1 covenant minimum. Credit ratings were Moody’s A1, negative outlook, and S&P A, CreditWatch negative.
Material changes versus Q1 2022
- Sales declined across all four segments. Organic sales fell 8.0% in Transportation and Electronics, 6.8% in Consumer, and 6.0% in Safety and Industrial; Health Care organic sales increased 1.4%. Segment operating income was $601M in Safety and Industrial, $294M in Transportation and Electronics, $360M in Health Care, and $179M in Consumer.
- Management cited weak consumer electronics demand, customer inventory reductions, lower disposable-respirator demand, Russia-related impacts, China COVID-related challenges, and lower consumer discretionary spending. Pricing, spending discipline, and productivity actions partly offset lower volumes and cost pressures.
- Q1 2023 diluted EPS included $0.21 per share of net special-item impacts, principally $0.15 per share of divestiture costs and $0.07 per share of litigation costs, partly offset by other adjustments. The company’s adjusted measures exclude specified items, including sales and estimated income from manufactured PFAS products it plans to exit.
- Operating cash flow improved primarily because working-capital movements were more favorable than in Q1 2022, partly offset by lower net income. Treasury-stock purchases were $29M versus $773M a year earlier.
Outlook, management commentary and significant risks
- Restructuring: 3M recorded a $52M pretax charge for actions affecting about 1,200 positions in Q1. Its 2023–2025 initiative is expected to affect about 8,500 positions and incur $700M–$900M in pretax charges; the filing says further actions are expected. Most Q1-approved actions were expected to be completed by year-end 2023.
- Investment and spin-off: 3M expected 2023 capital spending of $1.5B–$1.8B. It continued working toward a Health Care spin-off by year-end 2023 or early 2024, subject to customary conditions and market and other factors; 3M expected initially to retain 19.9% ownership. The filing provides no assurance of completion on that timeline or at all.
- PFAS: 3M plans to exit PFAS manufacturing and work to discontinue PFAS use across its product portfolio by the end of 2025. The filing describes evolving regulation, facility restrictions, remediation obligations, and extensive litigation as sources of potentially material costs and operational disruption. At March 31, recorded liabilities included $619M for other environmental matters, primarily PFAS-related, and $31M for non-PFAS environmental remediation. The respirator mask/asbestos accrual was $553M, excluding Aearo-related amounts; related insurance receivable was $4M.
- Aearo and product litigation: 3M reported a $1.2B accrued liability associated principally with its funding commitments for Aearo chapter 11 proceedings: $1.0B committed to a trust and $0.2B for projected case expenses, with possible additional funding if required. The Combat Arms earplug claims, bankruptcy proceedings, appeals, and mediation remained unresolved. The filing also describes approximately 4,150 respirator mask/asbestos claimants and approximately 4,150 AFFF lawsuits. For several major matters, including AFFF bellwether cases, 3M said no liability was recorded because a loss was not considered probable and reasonably estimable; outcomes could nevertheless be material.
- Other contingencies: The filing discusses PFAS matters involving the Zwijndrecht, Belgium facility, including a 571M-euro agreement with the Flemish Government and a newly approved remediation-related Site Decision whose full impact was undetermined. It also describes U.S. regulatory investigations, other PFAS lawsuits, and an ongoing FCPA-related investigation concerning China-based marketing activities.
- Guidance: The filing does not provide a clear full-year revenue or earnings guidance figure. It does provide the capital-spending and restructuring expectations above. Management identified inflation, supply-chain and manufacturing headwinds, foreign exchange, market demand, litigation, regulation, and execution of the Health Care spin-off and PFAS exit as important uncertainties.
Investor facts to verify
- Track subsequent sales, organic growth, segment margins, and whether demand in electronics, consumer markets, and personal safety improves.
- Review the development and cash-cost implications of PFAS litigation, environmental obligations, regulatory actions, and the Aearo bankruptcy and earplug claims; recorded accruals do not establish the ultimate exposure.
- Verify progress, costs, financing, tax conditions, and timing of the Health Care spin-off, including the planned retained ownership stake.
- Monitor restructuring charges and realized savings against the stated 8,500-position and $700M–$900M initiative.
- Assess debt, commercial-paper usage, credit-rating developments, and the sustainability of dividends amid legal, operating, and separation-related cash needs.